Amazon Key to Lock the Door on Privacy?

Do you want to give a private company the ability to see inside your home on a regular basis, and store this footage on their servers? Do you want to give strangers access to your house? Do you want to risk invalidating your home insurance in case of theft? And do you want to pay $249.99 to do so when you could get all this for free? Then Amazon has the product for you…

Okay, so that might be somewhat sensationalist, but none of the points are entirely off base. Amazon recently announced the November 8th launch (in 37 cities across the US) of its latest stab at revolutionising the world of online shopping. Their latest product, Amazon Key, proposes a smart lock for the home which will allow Amazon couriers to unlock your front door via a one-time remote access code, deposit the package inside you home, and then lock your door again. All this being recorded by the Amazon Cloud Cam which comes as part of the package deal. You can watch live via the camera or choose to review the footage after the delivery has taken place. All this is available for Amazon Prime customers only.

It is also possible to use the smart lock to give friends and family one-off, recurring or permanent access to your home by generating special access codes for them. Amazon has also announced its plans to eventually extend this access to cleaners and pet sitters or baby sitters etc.

Home Security

In analysing the potential impact and trying to assess the future success of Amazon Key there’s only really one place to start: the issue of home security. The idea of giving a complete stranger the ability to unlock your front door is enough to make many feel queasy. Admittedly, Amazon couriers are subject to background checks, and the camera recording footage and uploading it to Amazon servers, with Amazon knowing who is meant to be delivering the package should make it relatively easy for Amazon to identify potential thieves. Nevertheless, how stringent these background checks are we don’t know, and all this hasn’t stopped Amazon delivery drivers from routine thefts before, so who’s to say that this wouldn’t occur with Amazon Key?

The potential issues with home security by no means rest with the potential for theft from delivery drivers though. Hacking of Amazon’s new smart locks must be entertained as a possibility. Whilst this point applies to smart locks more generally and the likelihood of it occurring is surely remote at best, it is by no means impossible. By opening your home to Amazon you also open it to the possibility of cyber attacks in the future.

Amazon’s biggest challenge with this latest venture will be to overcome social norms, the concept of letting a stranger into one’s home unattended is quite simply an alien concept for most and demand for the Amazon Key will undoubtedly take time to gather as the idea tackles the obstacle of getting a foothold in society. The evidence thus far isn’t exactly in favour of the idea, countless tweets, like the one below, and comments on news articles voice their concerns. Whilst this clearly isn’t exactly how the Amazon Key will operate, it’s these kind of social fears that it will have to overcome in order to have success, and this is perhaps the biggest challenge facing the product.

The Competition

Among other threats to the product are, of course, all the alternatives which can act as substitutes. As mentioned earlier the combination of the Cloud Cam and the Key cost a total of $249.99, what Amazon have to ask themselves is whether there’s a market for the service at this price. Now, the benefit to the consumer is simply that the product arrives inside their home at any time of day, whether they be present at home or not, safe in the knowledge that the package won’t be stolen from their safe place. The question is how prevalent is package theft in society and how much of an inconvenience is it to the consumer.

Many articles report how package theft constitutes a growing issue, yet there is very little reliable data on the matter. Even then, for the majority of consumers who don’t purchase high value items from Amazon the value of any theft is highly unlikely to amount to anything near the $250 cost. Plus the fact that in the case of many thefts customers are able to claim back and work with Amazon to claim back on their purchase.

This point aside, there are many other ways that customers of Amazon can assure that their packages are stolen if they feel uncomfortable having products left in a safe location. A lock box would do the trick, leaving a key for the courier and then having them put the package inside, lock the box and post the key through the letterbox afterwards. All this for considerably less than the price at which Amazon offers its smart lock.

Other companies also offer smart locks at considerably lower prices, a quick google search for smart locks brought up locks from companies already established in the lock market, such as Yale, offering smart locks for less than £100. Can Amazon realistically compete in this market given the cost of its product?

Intrusion

Alongside this, the feelings of privacy in one’s own home may be cause for concern, with filming undertaken on the Cloud Cam being uploaded to Amazon’s servers. Yes these servers are secure to a high degree and the camera only has to be on whilst the parcel is being delivered, again Amazon will have to overcome the social reprehension regarding the inside of their homes being filmed and put onto Amazon’s servers. This has been a concern raised by many online since the launch of the product was announced.

Insurance

Questions also have to be raised about how insurance companies will react in the face of Amazon’s new idea. If theft occurs in the case of an Amazon delivery where you provide access to your house via code, will the insurance company cover this? This kind of uncertainty adds to the mountain that Amazon has to overcome to have success in the market.

Do I think that the Amazon Key will find success in the market? No. I just can’t see where the mainstream demand for the product will come from given the alternatives, such as lock boxes, and the fact that package theft for most isn’t too serious of an issue given that parcels can be left in a safe place or with a neighbour. Then there’s the almighty issue of the social norms and intrusiveness which Amazon must overcome to have success with the product. Yes there’s the potential for all this to change and smart locks may well become commonplace, but it’ll take a whole lot of time and effort to reverse. Thirdly Amazon is restricting it’s market by making the product only available to Prime customers. Granted most people considering purchasing a smart lock from Amazon will be those who buy from them regularly and already be Prime customers, but still it restricts their market somewhat.

All this being said, this move from Amazon is probably the right one strategically, no other company has made a move into this market before, and if it does take off Amazon only stands to benefit from first mover advantage. Further, Amazon can afford to take a loss on the product without it hurting the business in a meaningful way. In my article examining Jeff Bezos’ business strategy, I wrote about his desire to keep ahead of the game. This is a huge part of it, investing in products which could innovate and hit it big, even if they probably won’t.

 

 

The Greed of Man

For the past quarter of a century, the Hang Seng Index, a weighted index of selected companies on Hong Kong’s stock exchange, has been gripped by a peculiar phenomenon. This strange occurrence is often referred to as the ‘Adam Cheng Effect’ and revolves around, you guessed it, Adam Cheng.

Some background information about Cheng: a Hong Kong native born in the late 1940s, he began his professional career as a singer/actor in his 30s and gained notoriety in Hong Kong for starring in lead roles in TV shows such as Cold Blood Warm Heart and The Greed of Man, for both of which he performed the theme song.

Cheng’s acting though will be the focus for this article, particularly his work in the aforementioned TV series The Greed of Man which is in fact where the mysterious recurrence involving the Hang Seng began.

In the series Cheng played the role of a stock broker, Ting Hai, who accumulated a fortune through shadily short selling derivatives during what is known as a bear market (a general decline in the stock market over a sustained period where high investor optimism is increasingly replaced with fear and pessimism). Through this deceitful process the Ting family became exceptionally rich whilst often bankrupting those who invested with them. Eventually, they were defeated in a sort of stock market duel if you will, where the protagonist of the series Fong-Chin-bok’s investment company emerged victorious in a last man standing battle, leaving the Ting’s in billions of dollars of debt.

The series concluded with Ting Hai, having been backed by criminal syndicates and wanting to avoid physical retribution as well as jail time, forcing his four sons (shown after their defeat in the featured image) to commit suicide by jumping off the stock exchange building (they had also become embroiled in the deceitful stock market activities). Ting Hai himself then attempted the same, but survived the fall and was forced to see out a life sentence in prison for his misdemeanours.

How does this fictional story link to the Hang Seng though? Well, empirical evidence since The Greed of Man aired has led many to believe that this fictitious scenario has influenced the way people view and act regarding the stock market.

In October of 1992 after The Greed of Man aired for the first time on TVB the Hang Seng fell by 600 points. In isolation, this means nothing and doesn’t even suggest a link between Adam Cheng’s deceptive role and stock market behaviour, however when you look at what has happened since with the airing of other shows starred in by Cheng, things get a little eerie…

After Cheng’s next venture Instinct made it’s debut on TVB in 1994 the Hnag Seng fell by over 2000 points. In 1997 when Cold Blood Warm Heart aired the Hang Seng dropped by around 735 points. And the list goes on:

• Lord of Imprisonment, 1999: 6.5% fall
• The Conqueror’s Story, 2004: 198 point fall on the first day the drama was aired
• Return Home, 2007: 1165 point fall
• Master of Play, 2012: 10% fall
• Saving General Yang, 2013: 610 point fall on the day following the premiere

Finally, The Greed of Man was rerun on TVB in 2015 and the Hang Seng fell by roughly 560 points on the first day of the rerun. And these are just a few of the more prevalent examples.

Adam Cheng is the common denominator with all these, seemingly otherwise unexplained, drops in the stock market. Something about Cheng’s appearance on TV or in cinemas appears to be reminding people of his original big role in The Greed of Man, then affecting how individuals act in the stock market, presumably with a lot more distrust of it given the deceptive role Cheng played in the show.

There are of course those who doubt the theory, and there a some, albeit decidedly few, exceptions to the rule. After Cheng’s appearance in Bar Bender, Chor Lau-heng, and The Driving Power the Hange Seng Index did in fact rise, although not as much as some of the falls experienced after Cheng’s other appearances.

And of course, there would be immense difficulty to prove what has become popularised as the ‘Adam Cheng Effect’ given the vast array of variables which determine the level at which the stock markets operate, many chalk it down to coincidence and some just think of it as a quirky effect of no real significance. And yes admittedly these aren’t huge falls by comparison with other drops experienced on stock exchanges, but by no means does this mean they aren’t significant.

I think though it may speak to how we as people act in the stock market, and in the economy more generally. A few weeks ago I wrote an article focused on behavioural economics and some of the implications that has for how we act as economic agents. This is a field that is growing rapidly in popularity now, notably after Richard Thaler won the 2017 Nobel Prize for Economic Sciences in acknowledgement for his behavioural work.

No doubt, the ‘Adam Cheng Effect’ is a matter for the behavioural side of economics, and if bought into adds even more weight for the increasing use of behavioural studies to be incorporated into the study of economics more generally. The logic behind the effect though seems pretty clear: when The Greed of Man aired and became popular it detailed a story about how stockbrokers may act to make a fortune and swindle investors out of their money; Cheng became synonymous with the main antagonist Ting Hai, almost like how Daniel Radcliffe will always be seen as Harry Potter regardless of the character he may be portraying; whenever Cheng reappears on TV or in the cinema etc. those watching remember the underhand character he played in The Greed of Man, and the story more generally, and temporarily become more reluctant to invest in the stock market perhaps even selling off some of their stocks in the process.

I mean it’s clearly not a rational idea, the story is completely fictional, and doesn’t reflect anything that might actually affect whether stocks are going to rise or fall. Yet, the evidence seems remarkably stacked in favour of the ‘Adam Cheng Effect’. This is, I think, yet another example of how behavioural insights can explain some of the stranger decisions we see in economics.

Whether Adam Cheng is actually responsible for these stock market falls, we may never know. Cheng himself is aware of the effect but states that he thinks nothing of it nor that his character Ting Hai is linked to drops in the Hang Seng. However, if you notice Adam Cheng starring in a new role, or a rerun of one of his shows is about to rerun on TVB, it might be time to anticipate a drop in the Hang Seng.

Brilliant Bezos: From Garage to Global Empire

This article is something different from the main body of my previous writing, and is in fact an article I wrote for the Economics Society’s magazine ‘Assumptions’ here at university. Nonetheless, it contains interesting insights into how Jeff Bezos’ leadership has allowed Amazon to join the giants of commercial retail. Enjoy…

 

Pretty much anyone you’ll meet these days knows about Amazon, the magical online enterprise where one can find almost anything under the sun, and often have it delivered one the same day. Less though, know a lot about Jeff Bezos, Amazon’s CEO. However, anyone interested in leadership should study Bezos closely to see how he’s managed to turn Amazon from a business that he started in his own garage into a global behemoth, tipped by fortune.com to account for 50% of all online sales in the US by 2021.

In truth Bezos has had to show great quality in many areas, evidently a substantial deal of entrepreneurialism to even start the company in the first place. However, it’s his astute sense of leadership which I would like to focus on as a pivotal part of Bezos’ lucrative success.

Everyone knows customer satisfaction is a key to business success, none more than Bezos, he leads in such a way to stress the importance of this to employees. According to Forbes: ‘Bezos periodically leaves one seat open at a conference table and informs all attendees that they should consider that seat occupied by their customer, the most important person in the room.’

Another crucial value of Bezos’ leadership style is that he pays keen attention to what others may see as trivial, again to enhance customer experience. One of which is just how much consumers value their time. Bezos had Amazon construct metrics on page rendering which showed that even an extra 0.1 second delay in page rendering would result in a 1% decrease in sales’ volume. It’s this attention to microscopic details which puts Bezos right at the top.

Further Bezos looks at the big picture. This clearly isn’t a unique quality among leaders, in fact it should be the focus for leaders everywhere. What sets Bezos apart though is that he trusts in his ability to make something of his ventures eventually, he openly states that what business Amazon does in the next quarter isn’t of great significance to him, he’s perfectly willing to picture any new products he launches, such as the kindle, to turn profits on a five -to-seven- year timeline.

Looking at the big picture for Bezos doesn’t merely focus on long term goals though. Another vital aspect is keeping Amazon up to date with current and future trends such that it doesn’t become outdate, just like numerous physical stores that Amazon sent crashing out of business when internet retail took off.

Following trends falls under something that Bezos has coined as the ‘Day 1 Philosophy’ the notion that Amazon should always see itself, and act as, a start-up. They should be constantly developing, making decisions quickly, and staying focused on the customer. Bezos does all he can to reinforce the ‘Day 1’ mantra: it is the name of one of Amazon’s biggest buildings, located in Seattle, he also outlines the ‘Day 1’ philosophy in each annual letter to shareholders.

But just why is the idea that Amazon stays in the ‘Day 1’ phase such an important part of Bezos’ leadership? This is because Bezos assures that employees act upon the idea, maintaining Amazon as a leader which acts quickly, always staying relevant, as such Bezos describes ‘Day 2’ as: “Stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death, and that is why it is always Day 1”.

Bezos states that companies in the ‘Day 2’ phase make the right decisions but they make them slowly, falling behind the trends and out of pace with the growing world. Yet another aspect of his meticulous leadership is his commitment to speed. Speedy decision making, speedy service, speedy innovation. At Amazon Bezos has also implemented what he calls a ‘disagree and commit’ system for his employees. This puts forward the idea that even if workers disagree on a decision it is still possible for them to work towards the same goal.

Bezos has talked about the reservations he had over a proposed Amazon Prime TV series, but that he wrote back ‘I disagree and commit and hope it becomes the best thing we’ve ever made’. Bezos doesn’t just talk the game, he walks the game. For his employees to see that he actively carries out what he says to believe in himself gives them the confidence that what he says isn’t just something to impress shareholders.

All this is but a mere insight into the qualities Bezos has brought to Amazon as a leader, he also demonstrates great agility after having branched out into space travel, with his company Blue Origin, and further into media through his purchase of the Washington Post, claiming that he wants to bring it into the digital age.

These qualities reflect exactly why Bezos has managed to turn Amazon from a garage start-up to the dominant force in online retailing in a 20-year spell, incredible leadership and a healthy dose of entrepreneurial flair. His endeavour to get his employees to innovate and keep customers at the forefront of his business model explain why I have no doubt that he’ll remain near the summit of corporate leaders for many, many years to come.

Behavioural Economics and Booking Fees

Today, I am going to explore the relatively new phenomenon in the consumption world: booking fees, and its implication with regards to behavioural economics.

I wish to begin with an anecdote, last week some of my friends and I went to an event called Bongos Bingo in Birmingham, a night out kind of event which tours up and down the country where you play bingo for various prizes (alcohol, money, even a cardboard cut out of Jeremy Kyle). Aside from getting nowhere near winning any games of bingo, I was upset by the pricing structure of tickets for the event. The tickets cost a seemingly reasonable £8, given that some of the entrance fees go towards the prizes on offer, however once we got to the checkout a further fee, the dreaded booking fee, of £2 was added. This seemed insignificant as we were going to buy tickets collectively and thus a £2 booking fee shared between six of us wouldn’t have amounted to much. But no, this £2 booking fee was multiplied six times, once per ticket.

So all in all we were charged £12 for the menial task of booking six tickets, a task which carries virtually zero cost for the firm, for whom, once the initial basic software is set up such that they can take bookings, the cost is simply keeping their website up to date; essentially nothing. The knowledge that the firm were charging for a process carrying such little a cost to them was particularly frustrating, but it made me wonder about its relevance to economics, especially a field which I had read quite deeply into.

That field is of course behavioural economics, one of the areas which originally attracted me to the subject. Behavioural economics is defined as: a method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making. This relatively new branch of economics allows us as economists to understand why economic agents sometimes make what we would assume to be irrational decisions by applying psychological insights.

An example of this I came across in a book called Nudge (Thaler & Sunstein), in which schools tried to reduce unhealthy eating in schools simply through the placement of foods in the school cafeteria. By placing healthier foods in certain areas, mainly closer to the front making them the first things students saw, and putting unhealthy foods somewhat out of sight to the back, they were able to influence the which foods the children purchased. Now if the students all acted rationally, this kind of scheme should be ineffective: each student had the same choice set as before, thus microeconomic theory suggests to us that each student has the same utility maximising purchase of foods in both cases, yet chose to purchase in a way which didn’t maximise utility, either before or after the goods had been re-arranged. A parody of this features as the main image of this article, however I’m sceptical as to whether it would have a profound effect on a character such as Homer Simpson.

This of course has important insights for governments and policy, if they can influence consumers and ‘nudge’ them in the right direction, whilst maintaining freedom of choice, that can only be good right? Well of course there are other questions, such as what is right, is it really freedom of choice with the government almost playing puppeteer in the background? These are all normative questions, nonetheless, it’s clear that behavioural economics has implications in our lives.

Another case arises in a question I have seen crop up in numerous articles and books relating to behavioural economics, and it goes something like this: you go to a store and purchase two items, which cost a total of £1.10. One item is £1 more expensive than the other, how much does each item cost? Now this is a basic maths question, most children could solve it, but why then is the initial answer most people get false? Most initially go for £1.10 and ten pence, however if you think about it for a few seconds the answer is clearly £1.05 and five pence. This further clarifies how psychology can affect our mental thinking and how we analyse questions, and day-to-day life.

Now, back to my story, the firm Bongos Bingo has many choices when setting their ticket prices. Let’s assume that they decided £10 a ticket is the best price for them in terms of profit maximising, revenue maximising, or whatever other objective they may be pursuing as a firm. In the past, when booking fees didn’t exist they would have simply one option: to set the outright ticket price at £10. Nowadays however in the booking fee era, they have a whole world of choices, they could still set the outright price at £10, they could charge £8 for the ticket and a £2 booking fee as they did, they could pick any numbers in the £0 to £10 range, they could go as far as to charge nothing for the ticket and charge a £10 booking fee. All these options yield the same revenue per ticket for Bongos Bingo.

All these options should also yield the same total revenue for Bongos Bingo, however we can be almost certain that they wouldn’t. The ticket costs a total of £10 in each case, and thus consumers should see them as equally appealing, regardless of how much the ticket costs and how much the booking fee is.

But if you’re going to say to me that I would have bought a ticket in the case that it was advertised as free and then Bongos Bingo tacked on a £10 booking fee, I’d say that you’re crazy. Whilst a free ticket would have been attractive, the £10 booking fee I would have considered a pure scandal, and no chance would I have bought a ticket, but the tickets still would ave cost the same overall, so what gives?

Well, behavioural economics gives, and it explains why people were willing to buy a ticket at Bongos Bingo’s pricing structure. A total of £8 a ticket seems reasonable enough when you account for the prizes on offer, and adding on a £2 booking fee at the end seems a tad out of line, and you might complain about it to your mates as we did, but it’s not scandalous enough to prevent you buying the ticket once you’ve been committed at the £8 price level.

Whereas £10 a ticket may seem too high for some in the absences of the booking fee and may dissuade some consumers from buying, however I must say I would have been much more willing to buy at this price structure than at one with a high booking fee and low ticket price.

At the end of the day though, the lesson to learn is that behavioural economics can have important insights for the field of economics. Whether Bongos Bingo and other firms are aware of it or not, the way they set prices and what they offer to customers almost definitely involves some psychological and behavioural aspects, if they can understand these, perhaps they can improve their business strategy.

To conclude I’d like to direct anyone interested to a TED talk on behavioural economics given by Dan Ariely, a leading author in the field, entitled ‘Are we in control of our own decisions’. I found it interesting and hope you will too.

London Extends Lead as Top Financial Centre

This week London extended its lead over New York as the world’s financial capital, here I’ll look at why this news may not be as positive as it seems in terms of Britain’s long run financial prospects.

This was the 22^nd edition of the Global Financial Centres Index (GFCI) which takes into account 102 quantitative factors and qualitative aspects, assesses what are considered five key characteristics: business environment, human capital, infrastructure, financial sector development and reputation.

The study is measured on a scale of 1,000 points. Since the last study six months ago, London dropped only two, which equates to twelve times less than the 24 points lost by second-placed New York. Therefore London has stretched its lead at the summit by a total 22 points. This, accompanied by the fall for the six cities in Asia which reside in the top ten where Singapore and Tokyo fell the most, seems to be bright news for London and Britain as a whole amidst fears over the finanical uncertainty surrounding Brexit and the trade deals that the UK will be able to achieve as Brexit negotiations continue.

Nevertheless, we may have to consider London stretching its as more down to its competitors struggles, as opposed to its success. For example, New York’s loss of points (alongside San Francisco, Boston and Chicago who all took even worse hits than New York) has been widely attributed to its current political division. This especially reflects concerns over trade with President Trump’s desire to impose unilateral tariffs on Chinese exports to the US as well as his desire to pull out of the trade agreement between the US and South Korea, however given the current political concerns over North Korea and its nuclear weapons testing a breakdown of the Korus is surely unlikely and would make little political sense.

In fact the damage that Trump’s political agenda over free trade has done for America’s financial centres has probably been mitigated by the fact that many don’t take Trump’s goals on trade all too seriously, as the FinancialTimes put it ‘Companies have learnt quickly how to combat the president’s worst ideas on trade and discovered they have plenty of allies in both his White House and his cabinet. Many also don’t believe his threats anymore. For a president whose threats are his biggest currency that is only likely to lead to more frustration.’.

Companies have learnt quickly how to combat the president’s worst ideas on trade and discovered they have plenty of allies in both his White House and his cabinet. Many also don’t believe his threats any more. For a president whose threats are his biggest currency that is only likely to lead to more frustration.

Elsewhere whilst many of the top Asian financial cities lost points this time around, according to CNBC, a questionnaire conducted alongside the study asked respondents which financial centres they thought would become most significant in the years to come and six of the top nine came from the Asian-Pacific, with Shanghai, Qingdao, and Singapore claiming the top three spots.

However, I feel the key places against which Britain should measure its financial performance are those which are touted to be the main beneficiaries of the fallout from Brexit: Frankfurt, Dublin, Paris etc. It is known and has been reported that many large banks (several hundred banks and companies if TheGuardian is to be believed) and insurers have plans in place to move at least some of their staff and business to these European cities in order to minimise both disruption to their business and other potential costs that could arise from Brexit. Frankfurt is rumoured to be a potential hotspot with Morgan Stanley, Goldman Sachs, Nomura, and Standard Chartered just some of the big names who have reportedly chosen to expand their operations in Frankfurt in the wake of Brexit.

Here is where the potentially bad news comes for Britain, Frankfurt has shot up the rankings: from 23rd place a year ago to 11th in the most recent study. Meanwhile, Dublin has improved somewhat from 33rd to 30th, although with this just being a slight improvement may not be all that significant.

However, such a rapid and substantial rise for Frankfurt surely can’t be put down to chance. It is clear that Frankfurt has been taking advantage of the financial uncertainty that has, and continues to, surround Brexit.

This makes the ongoing Brexit negotiations increasingly significant for London and Britain who no doubt wish to maintain their edge as the financial capital of the world. Whilst uncertainty is undoubtedly having a negative impact as many companies choos to relocate in search of a more secure financial future, Britain and the Theresa May administration should be careful not to be hasty with the Brexit negotiations. Clarity over Britain’s future relationships with the world is important however it is important that Britain secures the most effective deals and best relationships for Britain’s future.

Nevertheless, there is a fine balance between erring on the side of caution in the negotiations and taking excessive time to reach an agreement for Brexit, as this would just lead to further uncertainty and leave Britain’s financial future in further peril.

Ultimately, we all know how historic Brexit has been and will be, we all know how important the negotiations over Brexit are, and these latest financial rankings with the convergence of other European economics powers just highlights this further.

The Mysterious Zipf’s Law

Zipf’s law is a concept I came across whilst doing some light reading over the summer and it intrigued me enough to research it further, here’s what I found…

One of the easier examples of Zipf’s law is its occurrence in language. The law states that the frequency of a word’s use is inversely proportional to its rank in a frequency table. That is to say, the second most commonly used word is used roughly half as much as the most used word and the third most commonly used word only used about a third as many times as the most frequently appearing word or two thirds the amount of times as the second most frequently appearing word. This concept baffled me when I read about it, in fact I outright didn’t believe it to be true despite it being printed in literature before my eyes.

Yet it is, Fagan and Gençay (2010) show that in the Brown Corpus of American English text, ‘the’ is the most frequently occurring word, and accounts for on its own nearly 7% of all word occurrences (69,971 out of slightly over 1 million). In accordance with Zipf’s Law, the second-placed word ‘of’ accounts for slightly over 3.5% of words (36,411 occurrences), followed by ‘and’ (28,852). This gives ‘of’ just over half the amount of occurrences of ‘the’ (52.04%), and ‘and’ a decent bit over a third (41.23%), but you get the picture.

What’s possibly even more interesting about Zipf’s law is that it doesn’t just occur in English, if fact it is present in almost all languages. Further the principle isn’t even restricted to languages but is applicable in a whole variety of areas, more on that later.

More interestingly it is, as of yet, unexplained. There have been attempts to do so, including from George Zipf himself who hypothesised that it may arise from what is called the principle of least effort; the idea that people using languages wish not to use any more effort than is necessary to understand each other and hence we see some words which can be used to explain many things used much more often than those which have more limited uses, resulting in a Zipfian distribution. Others have conducted statistical analysis into randomly generated texts to show that ‘words’ randomly generated from the 26 letters and a space bar, when each is equally likely to occur, follow Zipf’s law. Whilst this is interesting it seems sketchy as an explanation for Zipf’s law given that what we say and write in language isn’t exactly random.

How Zipf’s law ties with economics

This point comes back to what I said earlier about how Zipf’s law wasn’t only discovered in languages but in many other areas of life. It’s quite incredible just how many things follow a Zipfian distribution: website traffic, solar flare intensity, earthquake magnitudes, the diameter of moon craters, the popularity of opening chess moves, city populations, and even likes on Facebook (see featured image) to name a few. I’d like to focus on the latter to show that Zipf’s law at least in this case ties to economics.

Unsurprisingly given that we know so little about why Zipf’s law occurs , we don’t actually know how it links with economics, just that it must. I’ll start here with an example using the biggest cities in the USA. According to 2010 census data the largest city, New York, had a population of 8,175,133. This was followed by Los Angeles with 3,792,621 (46.39% of New York’s population), then by Chicago with 2,695,598 (32.97% of that of New York) and Houston with 2,099,451 (25.68% of New York’s population). Here we can see Zipf’s law in action once again: LA is slightly under what we might predict, falling about 3.6% short of what Zipf’s law suggests, but Chicago and Houston have populations within merely 0.7% of what we would expect them to be.

However, Zipf’s law doesn’t always apply: in the case of the EU we don’t find that the second most populated city has half that of the first, and so on. Why is this the case? An explanation for this comes from a group of researchers and was reported on in Nature, they say that their research shows that: ‘In fact, historically, the geographic level for Europe, at which an integrated evolution is observed, is the national state, while in the US, the whole confederation, not each independent state, has collectively and organically evolved towards a distribution of cities that follows Zipf’s Law. From this perspective, the US is an organic, integrated economic federation, while the EU has not yet become so, and shows little convergence to such an economic unit . . . It implies that any system which obeys this law must have internal consistency in its size distribution or its sample.’.

All this implies that for Zipf’s law to hold in the case of cities they must be integrated economically, therefore it works for any given country inside the EU, but not the EU as a whole, which evidently is not economically integrated.

Explaining Zipf’s law could make big differences in the way we understand nature, economics, and mathematics. Then again, it may prove absolutely nothing, or we may even never understand why it occurs. Either way, it’s a concept that intrigued me when I saw it, I enjoyed researching it, and hope you’ve enjoyed reading about it.

 

 

The Great Depression: An Insight on the Foolishness of Fixed Exchange Rate Mechanisms

In our economic history section of the course at university this year we learnt about the Great Depression of the 1930s: one of the most notable periods of economic struggle throughout recorded history. Here’s my take on the lessons we can learn from the Great Depression, how these were or weren’t applied in the Great Recession, and why fixed exchange rate mechanisms more generally just don’t work.

The 1930s Great Depression constitutes an unprecedented period in economic history, with price levels and growth rates plummeting with unemployment rates soaring in many developed economies. It is now generally agreed that adherence to the gold standard was the main propagator of the depression and leaving gold was labelled by Crafts and Fearon (2013) as: the critical precondition for recovery. However, economists can learn more than the fact that fixed exchange rate mechanisms can be dangerous in spreading financial crises. I intend to show some of the lessons to be learned from the Great Depression: the importance of expectations, independent monetary policy (having and using it) and the riskiness of banks’ lending decisions, and analyse whether these lessons were applied during the Great Recession of 2008.

During the Great Depression countries on the gold standard had their monetary policy constrained since they were unable to devaluate their currency given that it was pegged against gold, in the case of balance of payments deficits therefore the government must raise interest rates to defend the parity. Friedman and Schwartz (1963) calculate that the US money supply contracted by 1/3 (1929-1933) however the Fed should have lowered interest rates and increased the money supply in order to stimulate growth and prevent unemployment. Using the IS-LM model where the IS equation represents equilibrium in the goods market and the LM equation that of the money market, in the case of monetary contraction the LM curve shifts inwards causing a contraction along the IS curve and a new equilibrium at a higher level of interest and lower level of output, as shown graphically below. (Graph sourced from: mnmeconomics.wordpress.com)This higher interest rate increases the opportunity cost of consumption and investment having a deflationary impact, which caused prices to fall by 25% in the US (1929-1933) Crafts and Fearon (2013). This was worsened by the fact wages were downward rigid, thus the price fall pushed real wages up causing mass unemployment, peaking at 24.75% in the US (1933) (Source: u-s-history.com). Such figures indicate the seriously detrimental impact that deflation can have upon an economy, this is where the lesson lies: an independent monetary policy, and willingness to use it would have allowed governments to devaluate the currency via monetary expansion in case of balance of payments deficits until parity was restored thus reducing deflation and unemployment risks. However, ‘Monetary and fiscal policies were used to defend the gold standard and not to arrest declining output and rising unemployment’ Crafts and Fearon (2013). The Fed raised interest rates in 1931 and 1932 which prolonged the recession and transformed it into the Great Depression.

The second lesson is that expectations matter. This is somewhat linked to the importance of willingness to use monetary policy in the case of the Great Depression, in the sense that the gold standard mentality had become so engrained in policy decisions and central banks were so unwavering in their support of it that it was clear to economic agents that it was clear to economic agents that changes in policy that went against the gold standard wouldn’t materialise anytime soon, the gold standard became a religion almost for some central banks.

It is well known that uncertainty can threaten economic prospects since it discourages spending and investment however when this turns into pessimism as Bernanke (1994) hypothesised, the impact can be even more severe. Theoretically, this can be explained by use of macroeconomic equations: here inflation in any given period is equal to the expected rate of inflation plus a function of the output gap.

Under the adaptive expectations hypothesis where  we can substitute to get   this exemplifies the dangers of pessimism in the case of a negative output gap, which was experienced by many countries in the Great Depression given the mass unemployment. To generate inflation, the government needs to change inflationary expectations, which governments couldn’t do during the Great Depression due to staunch adherence to the gold standard, thus in the absence of policy change economic agents only expected further deflation causing a vicious cycle of falling prices, output and rising unemployment. Romer (1992) considers the devaluation carried out by the Fed in 1933/34 as crucial to the recovery since it indicated the end of a deflationary monetary regime: vital to changing expectations.

In these crucial areas, lessons were learned when the Great Recession struck in 2008, the initial impact of which was worse than that of the Great Depression for the first 15 months in terms of volume of global industrial production sparking fears of another depression, but thereafter the recovery was much quicker and more significant. As can be seen in the accompanying graph (Source: Crafts and Fearon (2013)).This was thanks largely to the actions taken by policymakers. There are two key points to be made when reviewing the actions taken: firstly, expansionary monetary and fiscal policies were undertaken on a large scale to stimulate the economies, something crucially missing during the Great Depression; secondly these actions were taken quickly and confidently which prevented deflationary expectations from setting in long term and maintained confidence on the part of economic agents that the situation would improve. After the start of the Great Recession both the Fed and Bank of England (BoE) cut interest rates heavily with the US going to 0% and the BoE heading to its lowest rate since 1694 by the end of 2008, even with these interest rates being near the zero lower bound it was very important for ensuring that deflationary expectations didn’t set in upon the economy, here it is clear lessons were learned from the Great Depression.

Both economies undertook huge quantitative easing policies in the following couple of years, raising the money supply hugely allowing the economies to recover. The American Restoration and Recovery Act set aside $787bn, an enormous fiscal stimulus, described by Romer in 2009 as ‘the biggest and boldest countercyclical action in America’s history’. The actions taken by the US and England were ‘monetary and fiscal policies were pursued on a scale that would have been unacceptable during the 1930s but, crucially, these bold initiatives prevented financial meltdown.’ Crafts and Fearon (2010, p.288).

Theoretically, this can be explained using the aforementioned IS-LM model. Monetary expansion causes an outward shift of the LM curve putting downward pressure on the interest rate, this effect is offset by expansionary fiscal stimulus causing an outward shift of the IS curve as demand in the goods market increases putting upward pressure on the interest rate. The net effect on interest rate is determined by the relative slopes of the IS and LM curves however evidently the impact on output is positive showing the important role monetary and fiscal policy can play in combatting recession.

These issues I feel are the most pertinent that economists and policymakers can learn from the Great Depression, albeit others exist: including as described by Crafts and Fearon (2010) that bank’s lending decisions don’t account for large social costs of potential bank failures since they could endanger financial stability and regulation is required to prevent excessive risk taking. However, given that the housing bubble in 2007 was effectively created by excessive risk taking from banks it appears that there are still lessons to be learned. In conclusion, given economic theory and data from the Great Depression willingness to use monetary and fiscal policies and the ability to influence the expectations of economic agents can be vital tools when battling financial crises, and having seen the comparatively rapid recovery after the Great Recession that these lessons, some of which at least, were learned.

A note on fixed exchange rate mechanisms generally

In the main body of this article I used the Great Depression to outline some of my main concerns regarding fixed exchange rates, most notably the loss of independent monetary policy and thus inability to devaluate the currency in the case of balance of payments deficits.

For me, achieving concurrence of economic circumstances across economies in the fixed exchange rate mechanism makes them excessively complicated. For example, many countries have tried to peg their currency against the dollar and been forced against it due to differing economic circumstances, notably China due to their large current account surplus.

I am of course aware of the supposed economic benefits of such mechanisms. Advocates point to the fact that a fixed exchange rate mechanism should help to reduce uncertainty and promote investment and helps reduce inflation since countries in a fixed exchange rate system must do so to maintain the parity, having said this this is an indirect means of targeting inflation, direct means would be better advised.

At the end of the day however, for all the economic arguments we can put forward for or against fixed exchange rates, the proof is in the figures. Empirical evidence heavily goes against fixed exchange rates. Gold standard: cause a global depression lasting over half a decade; ERM: Sterling forced to leave after two years when its situation became untenable; the Euro: left countries like Greece crucified after they couldn’t devaluate the currency.

That is my case against the fixed exchange rate.

A Question of Dining Culture & Incentives: UK vs USA

Why the American tipping system makes for a better dining experience, and how the UK could benefit from it in the not too distant future.

This summer I was lucky enough to jet off to the ‘Sunshine State’: Florida, USA. Amongst canoeing, theme park visits, and scorching hot beaches I also received a lesson in the vast cultural differences between two countries that have so much in common. From driving on the other side of the road to the toilets with large basins containing seemingly unnecessary volumes of water the difference in social norms is blatant. However, the one which interested me most as an economist was the customer service and tipping culture in restaurants, which felt a world away from that in the UK. All this led me to thinking, could the UK benefit from a move towards a restaurant system such as that of the United States?

Wages in the food retail industry are divided almost oppositely in the US and the UK: those in America coming primarily from tips and very little coming from the employer, whilst waiters/waitresses in the UK receive virtually all their pay through wages and a minute proportion from tips. In the UK the minimum wage varies depending on age ranging between £4.05 per hour for those under 18 up to £7.50 (the national living wage for those over 25). This provides a stark contrast to the federal minimum wage of just $2.13 per hour (or £1.64), although states are allowed to enforce a higher minimum wage and many do. However this federal minimum is a tad misleading given that, after tips, the wage per hour must reach $7.25 with employers paying the difference out of pocket if post-tip wages do not meet this threshold.

Therefore, could UK restaurant owners not reduce their wage costs if the tipping culture of the US were adopted? It certainly seems so, according to an article from The Atlantic 70% of hourly income for wait staff came from tips meaning that of the $13 median hourly wage only a minuscule $3.90 (or £3.01) came from the employer. This figure is less than half of the median paid in the UK of £6.27 (PayScale). With wages consisting majorly of tips in the US employers can afford to reduce their costs and therefore have greater profit potential, or more likely given that this is the case across the US be able to offer their produce at a lower cost to the consumer by passing on some of the savings from reduced wages. Then there is the case of living standards for the workers themselves. It is well known that wait staff are among the more vulnerable in society often needing multiple jobs just to get by. The aforementioned $13 median wage for US wait staff is a whole $5.50 above the enforced post-tip minimum wage. In the absence of tips it is difficult to envisage employers nationally paying anywhere near the current $13 average. The tipping system is beneficial for the workers, little doubt about it.

Of course real wages are a more pertinent measure and the purchasing power of $13 (£10.04) in the USA should be compared to that of the median hourly wage of £6.27 ($8.12) in the UK. However, when considering OECD purchasing power data which implies that $1 would buy you just $0.694 worth of goods in the UK it appears that with higher average living costs in the UK wait staff with higher nominal wages from tips in the US should be, on average, unambiguously better off.

A further implication of the difference in tipping culture lies with the incentive for customer service. Whilst even in the UK there should be an incentive for restaurant owners to promote good customer service to build reputation and customer loyalty, and also indirect incentive for wait staff in the sense that when business is booming there is greater opportunity for overtime shifts and less likelihood of layoffs, there is no sizeable direct incentive for customer service given that in the overwhelming majority of cases, regardless of the meal cost, tips never really exceed pocket change (PayScale quote hourly tips as ranging between £0.05-£2.56). Contrast this to the USA, where the direct incentive for customer service is so much greater; potential for tips is so much greater with the social anchor of ‘20% gratuity’. During our stay in Orlando we paid a visit to the farm themed restaurant Hash House A Go Go (pictured below), offering up superb super-sized portions of ‘twisted farm food’, and on their bill they advertised a formula to make sense of the often confusing US tipping system: 15% for average service; 20% for good service (the kind you might expect); 25% for service above and beyond. The direct incentive for excellent customer service here is apparent, for the minimal extra effort for work staff of putting on a smile, some decent small talk, and promptly refilling drinks they could stand to gain up to and extra 10% in tips (and on our roughly $70 bill an extra $7). This adds up to significant money when considering the amount of meals any waiter/waitress could serve hourly. Actual data to compare customer satisfaction in restaurants in the UK and USA is scarce, however I can tell you that the difference is noticeable: the wait staff in the US were all so friendly and approachable and not once did we have to ask for a refill. If this was true for my experience I’d wager it true for others. Again it all comes back to incentives: in the UK one could choose to tip 20% for good customer service however wait staff know this is almost totally unrealistic and know they will get little extra if anything for great customer service and thus there is minimal direct incentive for wait staff to go above and beyond. In the US though that extra $7 potential to gain from our meal acts as sufficient incentive for good customer service. This greatly improved our dining experience in the US, and I believe the UK dining experience could stand to gain a lot if tips provided such incentives to its wait staff.

Whilst the economic benefits seem widespread for employers and wait staff accompanied by a better standard of service the objection many hold is that the service comes across as overbearing and fake. Could this style of service fit with the UK culture? At first glance it appears difficult, even when I was there it seemed there was a fine line between wait staff being wonderful and not genuine, only motivated by tips. However, I fell the English dining culture has the potential to adapt, given a bit of stimulus. A stimulus I think isn’t impossible to achieve: in many restaurants around the UK restaurants have started adding service charges (normally around 10%) onto bills. Whilst customers can choose to opt out of this service charge, and some see it as underhand, over time if this concept becomes commonplace and customers become anchored towards ‘tipping’ more, wait staff will eventually have a similar incentive to go the extra mile in the knowledge that their customers are used to and willing to tip more generously.

At the end of the day, differences in culture and ways of doing things are what makes our life experiences unique in different places across the world. Nevertheless I thoroughly enjoyed my dining experience in America and think the UK would stand to gain a lot from implementing a similar system.

Cryptocurrency: The Phoenix of Economics

Today on JC Economics we go international in our collaboration with Anirudh Pai, a talented fellow undergrad at Warwick University, heralding all the way from California. Cryptocurrencies continue to dominate headlines in the world of trade with the value of Bitcoin continuing to surge. In his article, Mr. Pai, himself an experienced trader, gives us the inside track on the success of cryptocurrencies and what to expect from them in the future…

If one reverses history ten-thousand years or so, it’s clear that life was the definition of primitive: rough, brutish, and infinitesimally short for all creatures. With the culmination of the iron and bronze revolutions, life spectacularly improved for the majority of mankind as a consequence of sturdier weapons and agricultural tools. However, these pale in comparison to the dawn of trade; a system that catapulted humanity as far forward as the invention of fire.

Trade brought culture, capital, and information in a remarkable way because it catered to the whims of all nation-states. Historians consider the expansive trades between Mesopotamia and the Indus Valley as the first of these long-distance exchanges, fulfilling the dreams of any merchant who as Peter Bernstein says went: “Against the Gods.” But as Darwinism changed all creatures, in a similar fashion, it changed trade and markets; currency was then harnessed as an agreed-upon method of exchange – moving from animal pelts, to metal coins, and finally to paper money.

Today our money has no distinct value, called fiat for this reason, and if somebody burned their collection of dollar bills, it would not harm the financial system. More worrying rather is how money is viewed and how monetary policy in conjunction with grandiose corporations are the sole benefactors of the dysfunct system. Why is this the case? The collapse of Bretton Woods in 1973 led to free-floating exchange rates, allowing central banks to often have the final word over interest rates and other monetary phenomena.

Nevertheless, monetary policy has its roots more deeply in religion rather than in the natural sciences – negative interest rates were thought to be impratical in our theoretical models, but in reality, they are expanding in countries like Japan. In religion, one ascribes to a certain set of rules and never questions the content regardless of factual evidence; monetary policy is such an example where we’re forced to believe that it is a positive sum choice. Taking a glance from 2009 to 2011, we can observe that at the highest levels of American society, – the top 7%– net worths skyrocketed by 28%, from 2.5 to 3.2 million on average after the recession. The substantial increases at the top have not flowed to the coffers of the bottom 93 percentile, who saw their net worths evaporate by over 4%. In our naivety, we might say that the solution is to raise taxes, but that would be more akin to dumping water out of a sinking ship – the problem still remains and it grows and festers within monetary policy.

As we pointed to the start of trade as a turning point for our ancestors, historians will point to the failure of monetary policy that grew cryptocurrencies, and largely Bitcoin, out of its ashes. Methods such as open market operations and quantitative easing have failed to serve the needs of citizens over the past decade, thus begging the question if a contemporary system is necessary. The value of a blockchain-based system would largely exist within characteristics like the fixed supply of tokens, network incentivization, or removing barriers to entry.     If the supply of currency was set in stone – or in this case, mathematics – then there would be no instance where governments could eagerly print more currency, leading to hyperinflationary situations seen in the 1980s with Argentina. Furthermore, in a system like proof-of-work or proof-of-stake, individuals are incentivized to act in their and the network’s greatest interest, so they can reap the profits as well. Systems can only prosper with the proper incentives. In our current system, people are not rewarded for acting in the interest of others – they’re much better served developing their wealth and hoarding it: indeed what has occurred. The reason for the strife over Bitcoin is the potential to eradicate businesses that solely operate as middlemen or more accurately, as robber-barons. Corporations like Facebook, Uber, and Airbnb operate as sole intermediaries – their value lies within their ability to inconvenience the consumer: extracting enormous amounts of data from their personal lives or implementing substantial booking fees. On systems built on the blockchain, users can conduct business or chat with friends without a corporation watching every move and selling their data to the nearest government or advertisement agency.

These improvements, a few among many required, seem incredibly far-fetched – why should any government allow or even adopt blockchain technology? The pandora’s box has been unleashed: blockchain is here to stay, so governments must scramble to adopt it within their current framework. Russia, essentially Putin, is ramping up efforts to launch their blockchain-based currency, the CryptoRuble, according to various publications. And as the Chinese government has done in the past with other forms of technology, the internet and retail to name a few, their involvement in utilizing cryptocurrency seems inevitable.

With all this in mind, a hybrid system, monetary policy and cryptocurrency, appears to be  the most intelligent solution. Consumers, removed from the invariant middleman, would be able to use blockchain technology for transactions or communications among many other situations. Indeed, there are certainly faults with current cryptocurrencies – Bitcoin and Ethereum for example – including lack of liquidity, barriers to purchasing, and insufficient technical knowledge on the part of investors. Yet, companies in the blockchain sector are making headway: the process will become easier and more efficient over time thanks to businesses such as Coinbase and ConsenSys. But as the internet was able to not just survive, but thrive in our world – enriching the lives of many – it can be said that blockchain technology will do the same on an even greater scale for the years to come.

Time for the Death of Death Row?

Capital punishment and its application remains controversial, however does it make economic sense?

Today the death penalty forms part of the legal system for 56 countries worldwide, and 31 states in the US, and whilst the general trend is towards its abolition there are still fierce arguments heralding from it avid supporters.

This article’s main focus will be centred on the economic arguments surrounding the death penalty, however in order to assess whether the death penalty is a good idea as a whole arguments from all domains must be considered.

Starting with the idea of justice: the death penalty is only handed out in severe cases in most countries which use it; murder, war crimes, treason etc. For death penalty advocates the punishment acts as some form of justice and peace of mind that the offender isn’t able to re-offend in the future, however this can just as easily be achieved through life sentences without possibility for parole. For some, the death penalty is almost some sort of revenge, the classic biblical adage ‘an eye for an eye’ comes to mind. Again though, a life sentence without parole seems to yield the same outcome, if sent to a high security prison what quality of life does the offender have left thereafter?

One argument that seems to hold water though is the idea of closure. The idea that families that suffer from murder can, in some way, move on after the death penalty is administered and aren’t left with thoughts of the offender still alive out there somewhere stewing in a cell.

For me, the ultimate argument against the death penalty is the simple fact that it is irreversible. We all like to think that our legal systems make correct decisions all the time, however in reality we know this to be false. Add onto this the possibility of new evidence and the whole death penalty process seems unjust. In the case of an incorrect conviction, whilst you can’t give the wrongly accused back the period of life they spent on the inside, you can still give them the rest of it.

Others argue that the death penalty has further impacts for society due to its utility in preventing serious crimes, by acting as a deterrent. In reality though, this just isn’t true. Looking at states across the US, in each year since 1990 the murder rate in states that enforce the death penalty has been higher than those which don’t. On average between 1990 and 2016 states with the death penalty had higher murder rates by 29.19% (deathpenaltyinfo.org).

However, this doesn’t suggest that the death penalty is the cause of murder rates either, it could just be that states enforcing capital punishment have higher murder rates anyway, and would do so regardless of the application of the death penalty. This is argued by the National Research Council of the National Academies in a report where they stated “The committee concludes that research to date on the effect of capital punishment on homicide is not informative about whether capital punishment decreases, increases, or has no effect on homicide rates. Therefore, the committee recommends that these studies not be used to inform deliberations requiring judgments about the effect of the death penalty on homicide.”

John Donnohue and Justin Wolfers disputed arguments about the effect of capital punishment as a deterrent: “We show that with the most minor tweaking of the [research] instruments, one can get estimates ranging from 429 lives saved per execution to 86 lives lost. These numbers are outside the bounds of credibility.” (The Economists’ Voice, April 2006)

Whatever the true effect of the death penalty may be regarding deterrence, we do have some reliable data on the actual costs of the death penalty. In times past the death penalty was often used because countries didn’t have the prison facilities to hold all its prisoners and needed a quick fix. In contemporary society, in the developed world at least, this isn’t the case, yes there may be the problem of overcrowding in prisons but this can be dealt with if need be.

One argument you hear quoted often by supporters of the death penalty are supposed figures about the cost of life sentences. Often questioned is why should the taxpayer pay to keep a murderer in prison for decades when they could simply be administered the death penalty, freeing up prison space and no longer costing the taxpayer?

Contrarily, the data show that this supposed cost of life imprisonment isn’t as exorbitant as death penalty advocates claim, in fact in the overwhelming majority of cases capital punishment seems to impose a much greater burden for the taxpayer than non-capital cases.

Dr. Ernest Gross of Creighton University conducted an analysis of all states in America and ascertained estimates that states enforcing capital punishment pay an extra $23.2m a year on average compared against those with alternative punishments.

In Indiana, analysis prepared by the Legislative Services Agency for the General Assembly (2015), found that the average cost of a capital murder case tried before a jury was $789,581, more than 4.25 times greater than the average cost of a murder case tried to a jury in which the prosecution sought life without parole ($185,422). The analysis also found that a death penalty case resolved by guilty plea still cost more than 2.33 times as much ($433,702) as a life-without-parole case tried to a jury.

In Pennsylvania an average of $272m has been spent per execution since the reintroduction of the death penalty in 1978. Using data from a 2008 study by the Urban Institute, the Eagle calculated that cost of sentencing 408 people to death was an estimated $816 million higher than the cost of life without parole.

These aren’t just isolated incidents either, you’ll find a very similar pattern emerging all over the United States. It seems almost certain that the application of capital punishment ends up costing the taxpayer much more than those states seeking life sentences without parole.

So if this is the case, why do states persist with the death penalty? Firstly, reasons I covered earlier in the article. Secondly, the fact that institutions are slow to change probably plays a part, it takes time for momentum to gather against the death penalty, although it seems this is happening, slowly but surely. Thirdly, whilst it is clear that the death penalty is costing the taxpayer more, when divided to the individual taxpayer it probably seems a small, almost insignificant amount and hence the economic impact for the taxpayer doesn’t, for most, carry the same weight as the deterrence or closure arguments we discussed earlier.

Nevertheless, the death penalty represents an economic cost that could be reduced if the states sought life sentences without parole in its place. This, combined with the fact that wrongful convictions cannot be overturned with the death penalty, for me is a strong enough case for perpetual imprisonment as punishment for the most serious criminals, especially when this punishment ultimately achieves the same result.

Why Prawn Cocktail Is Here to Stay

In July 2017 crisp giants Walkers launched their latest promotional campaign which pitted popular flavours against one another with the ultimatum of losing the loser of the battle. Here I look at why this was such a clever campaign.

Prawn Cocktail vs Paprika, Salt & Vinegar vs Lime & Black Pepper, Smoky Bacon vs Bacon & Cheddar: these are the three battles, after which the losers will be gone forever. The prospect of losing some of the most popular flavours initially sparked outraged amongst fans:

Many others have satirically likened the debate to that of the Brexit vote, voicing their worry, here are a few of my favourites: 

The instant reaction for many, aside from the fear or anger over potentially losing their favourite crisp flavour, was why on earth are Walkers risking some of their most popular flavours are they mad? This is how it appears to most at first glance. However, if you look a bit deeper this advertising campaign isn’t actually risky at all.

Anyone with any knowledge on business, economics, or even common sense for that matter would be able to tell you that it’s probably not a good idea to discontinue your best-selling products. Recent figures showed that Salt & Vinegar, Smoky Bacon, and Prawn Cocktail were the 3rd, 5th, and 7th most popular Walkers flavours respectively. An astute company like Walkers clearly has no intention of not producing its best selling flavours.

The truth is, there’s no chance of this occurring. If we look at how the results are decided it boils down to 20% from an online vote, and 80% from single packs bought in store (this is actually a very clever decision from Walkers, more on that later). Some simple hypothesis testing using mean sales for the flavours can tell Walkers just how likely it is that that Paprika outsells Prawn Cocktail for example, and this can probably be used as a reasonable proxy for the other 20% coming from the public vote, it may not be perfect, but chances are if more fans prefer Prawn Cocktail, more will buy them, since any rational consumer if given a choice between the two flavours will buy the one they prefer, hence the one they would vote for. Yes, these consumers might prefer say, Salt & Vinegar to Prawn Cocktail and hence their choice on Prawn Cocktail vs Paprika wouldn’t be shown through their purchases, but it’s a reasonable enough estimate.

Further, this estimate doesn’t even have to be exact, the likelihood is the votes won’t even be remotely close. The British flavours are well established, so established in fact that all of the three flavours were in the top ten selling flavours both today, and all the way back in 1994, Salt & Vinegar coming in 2nd, Smoky Bacon in 4th, and Prawn Cocktail a respectable 5th (The Independent). Such longevity amongst the best selling flavours shows that these flavours aren’t going to be easily displaced. That’s 23 years of Walkers introducing new flavours, a whole new generation of customers buying their products, and the worst fall of any of these flavours was a meagre two places for Prawn Cocktail. This not only indicates the popularity of the flavours but also the fact that customers have a certain level of loyalty to the flavours, they’ve been round for decades and adult customers will have memories of eating them as children, and hence be much more attached to them than the newly introduced flavours.

That’s all assumptions though, albeit fairly strong ones, and even if one of these new flavours did beat one of the established ones it would probably have to reach the top five bestselling Walkers flavours in a three month period, which would suggest that Walkers is onto a winner and they may not be as reluctant to relinquish one of their established flavours.

Further, it may also be necessary to consider the concept of nationalism. These are three British flavours up against three non-British flavours, and given people’s strong national sense of pride it’s a fair assumption to believe that people who have even a slight preference in favour of the British flavour might vote for that flavour purely because ‘It’s British, this is Britain’. However, that point is to a certain degree hypothetical and there certainly isn’t hard data, so take it as you will.

Further Walkers probably don’t even produce as many packets of these new flavours as they do the established ones, since they certainly aren’t expecting them to sell as well. Therefore, some customers who would choose to purchase Paprika over Prawn Cocktail may not even be able to do so, since there simply aren’t as many packets stocked.

Now for some facts, in 2014 YouGov conducted a study which yielded the results that 23% of the population preferred the Salt & Vinegar of Walkers over all others and 11% preferred the Prawn Cocktail variety. So, almost one in four who would choose Salt & Vinegar over all others, not just Lime & Black Pepper. What are the chances then that over 50% of the remaining 77% would go for a crisp that isn’t established, has to beat out the other favourites, and probably isn’t even as generally available? Virtually none.

Whilst hard data is at a premium, fortunately here I have the opportunity to gather some data for myself using Twitter, where customers can voice their opinion via vote through a tweet, as shown. In the battle of Prawn Cocktail vs Paprika, which is oddly the only battle in which one can voice their tweet via vote, I took a random sample of all votes cast in a one hour period (by searching #chooseorlose and then searching for the latest tweets). I found a total of 276 votes for Prawn Cocktail against a mere 78 for Paprika, equating to 77.97% of the vote for Prawn Cocktail. Of course, this is just a sample of an hour’s worth of votes not all the votes from the three month period the campaign will run for. As such, I undertook a hypothesis test, where votes form a Bernoulli distribution where you can either, vote for prawn cocktail or not vote for Prawn Cocktail. Assuming a mean of 0.5 (if this were a fair battle and we expected half of the voters to vote Prawn Cocktail and half Paprika) the hypothesis test yields a value of z=10.52 in other words there is 0.00000 (and to many more decimal places) of 50:50 being the actual split of votes and even less chance of Paprika coming out on top in the overall vote. This, coupled with reasoning above, shows exactly why Walkers needn’t be worried in the slightest about losing one of its bestselling flavours.

However, sparking all this debate and publicity with a certain outcome was only part of Walkers’ advertising genius. Let’s take a look back at the structure of the competition: 20% decided through online votes, 80% decided through sales of individual packets. Walkers could have achieved the same outcome from the campaign with any combination of the two, whether it be 50:50, all online vote, or all sales. But, this mixture was, in my opinion, a very wise one. If they went for say 100% decision by online vote, there would be no incentive for fans of Walkers to purchase packets of crisps to save their favourite flavour, and the campaign would have no short term impact on sales. If they went for 100% decision by sales alone then there wouldn’t be any where near as many people tweeting about the battle, and obviously not voting on it.

This is why a 20:80 split was such a wise choice: it’s enough that people believe that their vote actually counts, and thus vote on social media further flooding other peoples’ timelines with their vote, the Walkers logo, and pictures of the crisp packets;it’s also enough that people feel as though they can actually make a difference by buying the crisp packets themselves (eg. someone with little preference between Walkers and another brand may choose Walkers during the promotion since they feel it contributes to saving their favourite flavour).

Further it is almost certain that Walkers have conducted some form of mathematical analysis into what split to choose 30:70 would have had the same effect no doubt but their research probably tells them 20:80 would yield greater revenue from sales without sacrificing too much social media publicity.

The success of this campaign from Walkers is I think undeniable, I mean, I found a total of 354 tweets about the debate in a one hour period, some time after the initial buzz of the campaign had worn off slightly. One shouldn’t underestimate the power of social media either: I searched for the average number of twitter followers for any account and found multiple quotes of around 200, I even found one site which claimed 707 but that seems very unrealistic for the ‘average’ twitter user, obviously not including celebrities with millions of followers, but multiply that 200 by the 354 votes from earlier and you get a total of 70,800. 70,800 times (approximately) that the distinctive Walkers logo pops up on timelines over Twitter in just one hour, all sparked by a debate which Walkers have under their control with virtual certainty, not bad.

Some other Twitter users showed exactly how they’ve perceived the scale of the Walkers campaign:

The publicity Walkers have generated is crazy, the key behind this success is a bit of creative thinking, and realising what gets more people talking than anything else. Competition, arguments, debates. People love to debate, to argue why they’re right and another person is wrong, and ultimately the thrill of the final victory. Honestly, having seen this campaign I’m shocked that no other company has carried out similar campaigns before that I can remember.

And that ladies and gentlemen, is how to advertise. Create a bit of division amongst the population by putting one of your most successful products on the line, get people arguing about it and promoting it on social media, all in the knowledge that there is zero chance of one of your best sellers losing the battle.

Well done, Walkers advertising department.